What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-08 compared with 2021-09-08 · 57 added, 60 removed, 105 unchanged (53% of the section changed)

9 unchanged sentences

uncertainties relating to general economic conditions, including any deterioration whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory);

the ongoing COVID-19 pandemic and associated containment and remediation efforts;

natural disasters such as hurricanes;

public health emergencies such as the ongoing COVID-19 pandemic and associated containment and remediation efforts;

the potential negative impacts of COVID-19 on the global economy and foreign sourcing;

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Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers.

As of July 31, 2021, we operated 589 stores in urban, suburban and rural markets in 33 states.

As of October 30, 2021, we operated 600 stores in urban, suburban and rural markets in 33 states.

COVID-19 Pandemic

In March 2020, the World Health Organization declared COVID-19 a global pandemic.

Since that time, the global economy has been, and continues to be, affected by COVID-19.

The pandemic has caused and may continue to cause significant disruptions in the U.S.

economy as the virus continues to spread or has a resurgence in certain jurisdictions.

The pandemic has caused and may continue to cause significant disruptions in the global and U.S.

economies as the virus continues to spread or has a resurgence in certain jurisdictions.

In response to the COVID-19 pandemic, effective March 20, 2020, we temporarily closed all of our retail store locations and distribution centers.

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The COVID-19 pandemic has resulted in periods of disruption for our business, including the temporary closure of our stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of products.

We saw improvement in our financial results and positive trends during the latter half of 2020 and into the first half of 2021 as certain governments began to ease restrictions and provide economic stimulus and vaccine distribution accelerated, leading to an increase in spending and increased customer demand.

We saw improvement in our financial results and positive trends during the latter half of 2020 and through the first three quarters of 2021 as governments eased restrictions and provided economic stimulus, along with the acceleration of vaccine distribution, leading to an increase in spending and increased customer demand.

We expect continued uncertainty in our business and the global economy due to the COVID-19 pandemic, including potential volatility in employment trends and consumer confidence, current or future restrictive actions that may be imposed by governments or public health authorities, the duration and extent of any economic stimulus programs, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs to maintain safe work and shopping environments.

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Expenses and, to a greater extent, operating income, vary by quarter.

Results of a period shorter than a full year may not be indicative of results expected for the entire fiscal year, particularly in light of the current uncertainty surrounding the economic impact of the COVID-19 pandemic.

Furthermore, as a result of the closure of our stores for at least five weeks in 2020 related to the COVID-19 pandemic, comparisons of expense ratios and year-over-year trends are not a meaningful way to evaluate our operating results for the twenty-six weeks ended July 31, 2021.

Results of a period shorter than a full year may not be indicative of results expected for the entire fiscal year, particularly in light of the continued uncertainty surrounding the economic impact of the COVID-19 pandemic.

Key Operating Statistics

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Finally, we monitor corporate expenses against budgeted amounts.

Thirteen Weeks Ended July 31, 2021 and August 1, 2020

Net sales increased $21.1 million, or 9.8% , to $ 237.3 million in the second quarter of 2021 from $216.2 million in the second quarter of 2020 .

The increase in sales was due to an 8.7% increase in comparable store sales and the opening of 16 new stores since the second quarter of last year, partially offset by the impact of closing six stores.

The 8.7% increase in comparable store sales resulted in an increase of $18.4 million in sales, while store opening and closing activity resulted in a net increase of $2.7 million.

The increase in comparable store sales was reflected in an increase of 5% in customer transactions and an increase of 4% in the average basket size.

Thirteen Weeks Ended October 30, 2021 and October 31, 2020

Net sales increased $28.9 million, or 14.5%, to $228.0 million in the third quarter of 2021 from $199.1 million in the third quarter of 2020.

The increase in sales was due to a 13.1% increase in comparable store sales and the opening of 19 new stores since the third quarter of 2020, partially offset by the impact of closing four stores and lost sales due to Hurricane Ida.

The 13.1% increase in comparable store sales contributed $25.3 million in sales, while store opening and closing activity resulted in a net increase of $3.6 million.

The 13.1% increase in comparable store sales was reflected in an increase of 12% in the average basket size and an increase of 1% in customer transactions.

Comparable store sales changes by “CITI” or major merchandise category were as follows:

Beauty & Accessories +20%;

Home & Lifestyle +4%;

and Footwear -1%.

Footwear +6%;

and Home & Lifestyle -7%.

Cost of sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) increased $13.4 million, or 10.5% , to $140.5 million in the second quarter of 2021 from $127.1 million in the second quarter of 2020 .

Cost of sales as a percentage of sales increased slightly to 59.2% from 58.8% due to an increase of 250 basis points in freight costs, partially offset by an improvement of 130 basis points in the core merchandise margin (initial mark-up, net of markdowns) and an improvement of 80 basis points in shrinkage.

Cost of sales (exclusive of depreciation) increased $20.3 million, or 17.5%, to $136.1 million in the third quarter of 2021 from $115.8 million in the third quarter of 2020.

Cost of sales as a percentage of sales increased to 59.7% from 58.2% due to an increase of 110 basis points in freight costs and a decrease of 80 basis points in the core merchandise margin (initial mark-up, net of markdowns), partially offset by an improvement of 40 basis points in shrinkage.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $17.8 million, or 30.8% , to $75.4 million in the second quarter of 2021 from $57.6 million in last year’s second quarter.

The increase was due primarily to significant favorable one-time expense reductions in the second quarter of last year related to COVID-19, including furloughs, store closures and reduced operating hours, abated rents, and other COVID-19 cost credits.

Also contributing to the increase was a $4.5 million increase in incentive compensation resulting from favorable operating results in relation to budget, as well as the general impact on expenses of opening 16 new stores since the second quarter of last year.

As a percentage of sales, selling, general and administrative expenses increased to 31.8% in the second quarter of 2021 from 26.7% in the second quarter of 2020 .

Selling, general and administrative expenses increased $5.6 million, or 8.0%, to $74.8 million in the third quarter of 2021 from $69.2 million in the third quarter of 2020.

The increase was due primarily to the general impact on expenses of opening 19 new stores since the third quarter of 2020.

Also contributing to the increase was a $1.0 million increase in incentive compensation resulting from favorable operating results in relation to budget.

As a percentage of sales, selling, general and administrative expenses improved 200 basis points to 32.8% in the third quarter of 2021 from 34.8% in the third quarter of 2020.

Depreciation.

Depreciation expense increased $0.1 million, or 1.2% , to $5.0 million in the second quarter of 2021 from $4.9 million in the second quarter of 2020 .

Depreciation expense increased $0.8 million, or 17.5%, to $5.5 million in the third quarter of 2021 from $4.7 million in the third quarter of 2020.

Income Tax Expense.

Income tax expense was $3.8 million in the second quarter of 2021 compared to $6.2 million in the second quarter of 2020 due primarily to a decrease in pretax income.

Net income decreased $7.4 million to $12.5 million in the second quarter of 2021 compared to $ 19.9 million in the second quarter of 2020 due to the factors discussed above.

Twenty-Six Weeks Ended July 31, 2021 and August 1, 2020

Net sales increased $190.4 million, or 57.3% , to $522.7 million in the first half of 2021 from $332.3 million in the first half of 2020.

The increase in sales was due to a 55.5% increase in comparable store sales and the opening of 16 new stores since the end of the second quarter of last year, partially offset by the impact of closing six stores.

The year-to-date increase in comparable store sales was primarily due to the temporary closure of all 574 of our stores in the first half of last year as a result of the COVID-19 pandemic.

Income tax expense was $2.5 million in the third quarter of 2021 compared to $2.2 million in the third quarter of 2020 due primarily to an increase in pretax income.

Net income increased $2.0 million to $9.0 million in the third quarter of 2021 compared to $7.0 million in the third quarter of 2020 due to the factors discussed above.

Thirty-Nine Weeks Ended October 30, 2021 and October 31, 2020

Net sales increased $219.2 million, or 41.3%, to $750.6 million in the first thirty-nine weeks of 2021 from $531.4 million in the same period of 2020.

The increase in sales was primarily due to the temporary closure of all of our stores in the first half of 2020 as a result of the COVID-19 pandemic, combined with strong comparable store sales and the opening of 19 new stores since the end of the third quarter of 2020, partially offset by the impact of closing four stores and lost sales due to Hurricane Ida.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) increased $92.8 million, or 43.9% , to $304.3 million in the first half of 2021 from $211.5 million in the first half of 2020.

Cost of sales as a percentage of sales decreased to 58.2% in the first half of 2021 from 63.7% in the same period of 2020 due to an improvement of 580 basis points in the core merchandise margin (initial mark-up, net of markdowns) driven by lower markdowns, along with an improvement of 90 basis points in shrinkage, partially offset by an increase of 120 basis points in freight costs.

Cost of sales (exclusive of depreciation) increased $113.1 million, or 34.5%, to $440.4 million in the first thirty-nine weeks of 2021 from $327.3 million in the same period of 2020.

Cost of sales as a percentage of sales decreased to 58.7% in the first thirty-nine weeks of 2021 from 61.6% in the same period of 2020 due to an improvement of 340 basis points in the core merchandise margin (initial mark-up, net of markdowns) driven primarily by lower markdowns, along with an improvement of 70 basis points in shrinkage, partially offset by an increase of 120 basis points in freight costs.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $41.6 million, or 37.2% , to $153.3 million in the first half of 2021 from $111.7 million in the first half of 2020.

The increase was due primarily to significant favorable one-time expense reductions in the first half of last year related to COVID-19, including furloughs, store closures and reduced operating hours, abated rents and other COVID-19 cost credits.

Also contributing to the increase was a $13.0 million increase in incentive compensation resulting from favorable operating results in relation to budget, as well as the general impact on expenses of opening 16 new stores since the second quarter of last year.

As a percentage of sales, selling, general and administrative expenses decreased to 29.3% in the first half of 2021 from 33.6% in the first half of 2020.

Selling, general and administrative expenses increased $47.2 million, or 26.0%, to $228.1 million in the first thirty-nine weeks of 2021 from $180.9 million in the same period of 2020.

The increase was due primarily to significant favorable one-time expense reductions in the first half of 2020 related to the COVID-19 pandemic, including furloughs, store closures and reduced operating hours, abated rents and other COVID-19 cost credits.

Also contributing to the increase was a $14.0 million increase in incentive compensation resulting from favorable operating results in relation to budget, as well as the general impact on expenses of opening 19 new stores since the third quarter of 2020.

As a percentage of sales, selling, general and administrative expenses improved 360 basis points to 30.4% in the first thirty-nine weeks of 2021 from 34.0% in the first thirty-nine weeks of 2020.

Depreciation.

Depreciation expense decreased $0.2 million, or 1.9% , to $9.7 million in the first half of 2021 from $9.9 million in the first half of 2020.

Depreciation expense increased $0.6 million, or 4.4%, to $15.2 million in the first thirty-nine weeks of 2021 from $14.6 million in the same period last year.

Asset Impairment.

There were no asset impairment charges in the first half of 2021.

In the first half of 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.

Income Tax Expense/Benefit.

Income tax expense was $11.9 million in the first half of 2021 compared to an income tax benefit of $0.4 million in the first half of 2020 due primarily to pretax income this year compared to a pretax loss in the first half of last year.

Net Income/Loss.

Net income was $43.4 million in the first half of 2021 compared to a loss of $1.0 million in the first half of 2020 due to the factors discussed above.

There were no asset impairment charges in the first thirty-nine weeks of 2021.

In the first thirty-nine weeks of 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.

Income Tax Expense.

Income tax expense was $14.4 million in the first thirty-nine weeks of 2021 compared to $1.8 million in the first thirty-nine weeks of 2020 due primarily to higher pretax income this year.

Net income was $52.4 million in the first thirty-nine weeks of 2021 compared to $5.9 million in the same period of 2020 due to the factors discussed above.

Liquidity and Capital Resources

Our principal sources of liquidity consist of:

(i) cash and cash equivalents (which equaled $76.8 million as of July 31, 2021 );

(ii) short-term investment securities (which equaled $24.6 million as of July 31, 2021);

(i) cash and cash equivalents (which equaled $12.0 million as of October 30, 2021);

(ii) short-term investment securities (which equaled $35.5 million as of October 30, 2021);

(iii) short-term trade credit;

(iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory;

and (v) a revolving credit facility with a $75 million credit commitment (with no borrowings as of July 31, 2021 ).

and (v) a revolving credit facility with a $75 million credit commitment (with no borrowings as of October 30, 2021).

Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors.

Cash Flows From Operating Activities .

Net cash provided by operating activities was $56.8 million in the first half of 2021 compared to $55.4 million in the first half of 2020.

Sources of cash in the first half of 2021 included net income adjusted for insurance proceeds and non-cash expenses such as depreciation, non-cash operating lease costs, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $82.2 million (compared to $33.4 million in the first half of 2020 ).

Other significant sources of cash in the first half of 2021 included a $14.3 million increase in accounts payable (compared to a $2.2 million decrease in the first half of 2020) due to a high volume of merchandise receipts during the final two months of the second quarter of 2021, with nearly all of such purchases still in accounts payable at the end of the quarter.

Significant uses of cash from operating activities in the first half of 2021 were (1) a $22.6 million decrease in accrued expenses and other long-term liabilities (compared to a $13.2 million decrease in the first half of 2020) due primarily to payments of operating lease liabilities;

(2) a $9.7 million increase in inventory (compared to a $43.7 million decrease in the first half of 2020) due to replenishing our merchandise in 2021 following robust sales in the fourth quarter of last year;

and (3) a $4.8 million decrease in accrued compensation (compared to a $0.1 million increase in the first half of 2020) due to payment in the first quarter of 2021 of incentive compensation accrued in the second half of last year.

Net cash provided by operating activities was $54.9 million in the first thirty-nine weeks of 2021 compared to $63.0 million in the same period of 2020.

Sources of cash this year included net income adjusted for insurance proceeds and non-cash expenses such as depreciation, non-cash operating lease costs, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $110.8 million (compared to $59.6 million in the first thirty-nine weeks of 2020).

Other significant sources of cash included a $15.9 million increase in accounts payable (compared to a $7.7 million increase in the same period last year) due to the timing of invoices and payments, as well as an increase in inventory balances compared to the third quarter of last year.

Significant uses of cash from operating activities in the first thirty-nine weeks of 2021 were (1) a $36.3 million decrease in accrued expenses and other long-term liabilities (compared to a $25.3 million decrease in the first thirty-nine weeks of 2020) due primarily to payments of operating lease liabilities;

(2) a $23.4 million increase in inventory (compared to a $23.9 million decrease in the same period last year) due to replenishing our merchandise in 2021 following robust sales in the fourth quarter of 2020;

(3) a $6.9 million decrease in income taxes payable/receivable due to the payment of income taxes;

and (4) a $6.5 million decrease in accrued compensation (compared to a $3.4 million increase in the same period last year) due to payment in the first quarter of 2021 of incentive compensation accrued in the second half of 2020.

Cash Flows From Investing Activities.

Cash used in investing activities was $36.4 million in the first half of 2021 compared to cash provided of $37.4 million in the first half of 2020.

Cash used in the first half of 2021 consisted of $24.6 million for purchases of short-term investment securities and $12.0 million for purchases of property and equipment.

Cash provided in the first half of 2020 was primarily from the sales of investment securities due to the pandemic, partially offset by $5.8 million used for purchases of property and equipment.

Cash used in investing activities was $56.1 million in the first thirty-nine weeks of 2021 compared to cash provided of $31.3 million in the same period last year.

Cash used in the first thirty-nine weeks of 2021 consisted of $35.5 million for purchases of short-term investment securities and $20.8 million for purchases of property and equipment.

Cash provided in the first thirty-nine weeks of 2020 was primarily from the sales of investment securities due to the COVID-19 pandemic, partially offset by $11.9 million used for purchases of property and equipment.

Cash Flows From Financing Activities.

Cash used in financing activities was $66.8 million in the first half of 2021 compared to cash provided of $34.0 million in the first half of 2020.

Cash used in the first half of 2021 consisted primarily of $64.4 million for repurchases of our common stock.

Cash provided in the first half of 2020 was the result of a net drawdown of $41.6 million on our credit facility due to the pandemic, partially offset by $7.1 million used for repurchases of our common stock and dividend payments.

Cash used in financing activities was $109.9 million in the first thirty-nine weeks of 2021 compared to $17.6 million in the same period last year.

Cash used in the first thirty-nine weeks of 2021 consisted primarily of $107.2 million for repurchases of our common stock.

Cash used in the first thirty-nine weeks of 2020 consisted primarily of $17.0 million used for repurchases of our common stock and dividend payments.

Cash Requirements

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We have also used cash to repurchase shares of our common stock.

In the first half of 2021, pursuant to our stock repurchase program, we repurchased 502,257 shares of our common stock at an aggregate cost of $42.5 million.

In the first thirty-nine weeks of 2021, pursuant to our stock repurchase programs, we repurchased 1,023,343 shares of our common stock at an aggregate cost of $85.3 million.

In addition, we repurchased in a block trade 250,000 shares of our common stock at an aggregate cost of $21.9 million.

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We will continue to monitor the situation and take action as necessary to reduce our expenses and preserve our financial flexibility.

Recent Accounting Pronouncements

See discussion of Recent Accounting Pronouncements in Note 1 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.

Critical Accounting Policies

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Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk during the twenty-six weeks ended July 31, 2021 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 30, 2021 .

There have been no material changes in our market risk during the thirty-nine weeks ended October 30, 2021 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 30, 2021 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis